The world of forex is very big and many different strategies have come along with it. An important strategy that we want to focus on today is the London breakout strategy. The London market is known as the center of forex trading, and about 43% of forex transactions happen in London. This market importance makes the London breakout a very profitable strategy. How to use this strategy and how to apply it to your trading and more information will be discussed below.
What is the London Breakout Strategy?
The forex market is known to have three main time zones or sessions. These three are the New York session, the London session, and the Tokyo session. What makes the London session special is the overlap that happens between sessions. It overlaps with the late Tokyo market in the morning and the New York market around the afternoon.
This means the London breakout is a day trading strategy that relies on the ranging price of the market that was before it. By finding a range-bound market you can put resistance and support lines to help decide whether to go long or short when the price breaks out. You can say it is a breakout strategy that depends on the movement of the London market that happens from the effect of other markets.
How to use London Breakout in Forex
Applying the London breakout strategy to your trading is very simple. The first thing to remember is that short-term intraday traders can make the most use of volatile market hours. The market’s sudden jumps are what day traders profit from the most, meaning their ideal setting is a quick-paced, volatile one. Reacting to the overnight news from the New York market, which often sets the tone for the day, drives much of the activity during the London breakout. Traders that pick London time to trade will determine whether to continue trading in the same direction as the current trends or to go against the grid based on what happened in the West.
When first starting take a look at the past few candles from the Asian market (which is from 12 am to 8 am GMT). You can then plot two horizontal lines, one for the highest point and the other for the lowest. These two lines are the support and resistance lines. When the price breaks above your resistance line (the top line), this signals you to buy. However, if it breaks under your support line (bottom line) you should sell. This means you can go short or long on a trade depending on where the price breaks.
Placing orders
After determining your support and resistance lines you should place two orders. The first one is the buy order, which is set above the resistance line by 1-2 pips. Risk management is also important so don’t forget to put a stop loss under the support line by around 5 pips. Next, the sell order is set under the support line by 1-2 pips. The stop loss should be about 5 pips above the resistance line. By applying all this you can open a position as soon as the price breaks from either end.
Why use the London Breakout
The London breakout is a well-known strategy for many traders. While it is acknowledged as one of the simplest intraday techniques and frequently provides traders with a satisfying amount of money, it is also fair to state that your performance will depend on several variables. The good thing is that London breakout can be adjusted quite a bit, so feel free to experiment with your tactics and the parameters to find the most convenient course of action. It is always a good idea to do some back-testing and practice using a demo account, just like with any other technique.
The pros and cons
For every strategy you learn always know the advantages and drawbacks that come with it. The following are the pros and cons of the London breakout strategy.
Pros
- Stop losses can be very useful for traders. Using them with this strategy can lower your risk exposure.
- Sussecful trades can be very profitable and rewarding.
- Trading volume can be used in favor of the trader to avoid losses that may occur.
- Simple to apply to your strategy.
Cons
- False breakouts can cause you to lose all the profit you made in a trade.
- Time-consuming since you have to examine the breakout and make sure it’s not false.
Final Thoughts
The London breakout strategy is well-known among traders. This strategy can be very profitable when done right. Using the strategy correctly won’t be difficult for most traders. It mainly uses support and resistance lines to identify the breakouts. Risk management is always important, so most traders use stop losses along with their trades. Loss can occur when some breakouts falsely signal their direction.
